A “world first” deal between the Commonwealth Bank of Australia and Wells Fargo provides a preview of what the future of trade may look like.
Last month, the Commonwealth Bank of Australia and Wells Fargo completed a trade transaction that utilised the nascent trio of technologies: blockchain, smart contracts and the Internet of Things (IoT).
Involving a shipment of cotton from the US to China, the deal highlights the increasing level of disruption that is occurring in the trade space and how disparate emerging technologies can be applied in practice.
Commenting on the deal, Michael Eidel, Executive General Manager Cash-flow & Transaction Services at the Commonwealth Bank of Australia (CBA) says: “Trade finance is undeniably overdue for a technological makeover. The process is inefficient and cumbersome. The interplay between blockchain, smart contracts and the Internet of Things is a significant development towards revolutionising trade transactions that could deliver considerable benefits throughout the global supply chain.”
A closer look at the deal
How then does it all work? According to the information provided to Treasury Today from CBA, the first step required all parties involved in the transaction to work together to create a contract that detailed the terms of the trade – not too dissimilar to the creation of a letter of credit.
Once agreed, this contract was digitised using Skuchain’s Bracket Based Obligation smart contact technology and uploaded to a private distributed ledger held between the banks and corporates involved in the transaction. At this stage, the contract could no longer be amended and was fully visible to all parties involved in the transaction.
The physical movement of goods then began and a GPS tracking device was embedded into the container. This enabled a real-time view into the whereabouts of the container, allowing the companies to potentially negotiate price should there be any diversions off course on the way (something that is not readily available through traditional means) – although this wasn’t part of this particular experiment.
The tracking tool also acted as a physical supply chain trigger. This meant that as the shipment passed through pre-defined trigger points data was sent that activated instructions coded into the smart contract. This then prompted events such as financing, the exchange of documentation and the instruction to make the final payment.
“On their own, each of the three emerging technologies holds huge promise,” says Eidel. “But it is the interplay between emerging technologies where we see exponential possibilities.”
Corporate benefit
What then are the benefits of using these technologies? In the opinion of Eidel it firstly increases transparency. “By using the one blockchain system, the process becomes completely transparent to designated parties, and all players can track the transaction’s progress,” he says.
The use of the IoT then adds further transparency on top of this. “Tracking the shipment meant all parties could follow the goods in real-time enabling payment and risk to match the actual physical flow of goods – historically these were linked to the paper flow,” he explains. In doing so those involved in the transaction were provided greater certainty around the location of the goods and how the shipment was progressing. What is more, with smart contracts, the real-time nature of the contract means payment can be immediate, insurance policies can be flexible and parties have complete visibility over their liabilities.
For Ediel, the second headline benefit is related to the time spent on the transaction. “With blockchain, all documentation (except bills of lading) is digital,” he outlines. “The transfer of information is almost instant.
“The smart contract allows the documents to be automatically approved. The metadata that describes underlying documents is automatically matched off by the system confirming that the documents align to the initial contract between the buyer and seller. This may remove the need for a physical document check by humans, and can be more accurate and much faster,” he adds. “The smart contract system then confirms that payment (deferred or otherwise) is ready to be made. This reduces the risk and increases speed, while simultaneously reducing costs.”
Wait and see
These benefits are, of course, applicable to corporates around the world. However, in Asia Pacific, where the LC is still a widely-used instrument, it could be revolutionary. “We see significant benefits of this technology for a region where paper based LCs are still a mainstay,” says Eidel. “With intra-regional trade across Asia growing in importance, these often-short voyages are particularly susceptible to the issues brought about by the delay in documents. These delays and the loss of time and money which they cause could become an issue of the past by utilising these technologies.”
But as with all innovative solutions, the question on many treasury professionals’ lips is: “when can we begin utilising this in our everyday operations.” The answer seems to be not yet. Eidel is keen to highlight that whilst this is an “exciting first step” there remain “significant challenges to be solved, like scalability, security, and interoperability”. Nevertheless, significant change seems to be very much on the horizon.
